As the saying goes, 'cash is king'. Without cash (or liquid assets), your ability to pay any current obligations, whether an expense or a liability will be seriously impaired and can force you into a liquidity crises or personal bankruptcy, regardless of how much other illiquid assets you may have.
Cash management is the efficient collection and disbursement of cash to help achieve your financial goals.
Making effective use of your cash flow is the starting point for growing your wealth because it helps you accumulate the necessary savings that become the base for wealth growth through investing.
The two activities in cash management that can accelerate or derail your wealth goals are the level of debt you have relative to your cashflows and assets and your savings rate of cash that you receive periodically.
But the starting point for effectively managing your cash is to first track the sources and the uses of your cash and then devise strategies to skillfully manage these sources and uses by concentrating on diversifying your sources and increasing the inflows from those sources and using the generated cash wisely, by reducing or not increasing your expenditure and channeling cash to uses that will grow your wealth (saving, investing, starting a business).
Nine key steps you can follow to start skillfully managing your cash are:
9 Steps to Managing Your Cash Skillfully
- Start Tracking Your Expenditures - First, find out how you are using your money on expenses. Every single item must be tracked. You will be surprised at how much you spend on seemingly inconsequential items.
- Know Your Income Sources - The next step is to list all your sources of income and track all the amounts you receive. Every single source and amount matters.
- Identify All Liabilities - Now list all that you owe and the amounts owed
- Outline all assets - Here you now list all that you own, regardless how you financed it (whether using cash or debt)
- Create a Budget and stick with it - If you started steps 1 and 2, you now know what your spending patterns are and can now come up with a plan to help you spend you spend in a more conscious and deliberate manner.
- Pick a savings plan and begin saving, no matter how small - Now make sure that one of the key items in your uses of funds is an allocation to savings, regardless of how small the amount is. If you need to use a piggy bank to start saving, use it.
- Cut down on some expenditures to save more - Now that you have been tracking your expenses for sometime, you will begin to see certain items of expenditure that can be reduced or eliminated completely. This will free up some cash that can be used for paying down any debt you have quickly or saved.
- Pay down debt quickly - Debt can derail your wealth accumulation goals. Freeing yourself of the burden of excessive levels of debt can really inject some fuel into your personal financial planning efforts. Check out this post for some methods you can adopt to start paying down your debt.
- Diversify your income sources - The more sources of cash you have, the more you can save and invest and the faster you can achieve your financial goals. And if you have been executing steps 1 to 8 religiously, then this last step becomes the icing on the cake, as long as a significant portion of this additional income is channeled into savings and investing.
Once you are able to successfully execute Steps 1 and 4, you will now be able to also compile your personal financial statements, just like a business does so you can more easily monitor your progress, know the state of your finances at any point in time and analyze your finances to see where improvements can be made.
- Steps 1 and 2 will enable you compile your Personal Income Statement
- Steps 3 and 4 will help you compile your Personal Net Worth Statement or Balance Sheet
- And then with all the information from 1 to 4, you can then prepare your Personal Cash Flow Statement.
These steps are however not one-off but must become an integral part of your financial planning routine. In fact, they form the sources of data that you will need when you start creating various plans in subsequent parts of your personal financial planning journey, whether you do it yourself or engage a professional to put those plans together for you.
Some of these tasks require frequent monitoring, such as your expense tracking, which is a daily task. While others may need less frequent tracking, such as income, liabilities and assets, which will be tied to how frequently the items under them change.
Your To Do
Your task here is to at least start tracking your expenditure diligently over the next 30 days, then progressively add the listing and tracking of the other three items of income, liabilities and assets in each subsequent 30 day period.
Fortunately, there are various applications to help you track these items, including smart phone apps that can help you track your expenses as you incur them on the move.
Your goal is to start!
What applications are you using to track these items and how consistent have you been doing it? Are there any tips or tricks that you use to make it easier for you to accomplish any of these 9 steps? Do share your experience and thoughts below to help others also achieve their financial goals by commenting below.